Biden says he's 'very optimistic' about a debt ceiling deal

WASHINGTON — President Joe Biden said he was "very optimistic" on Friday about reaching a compromise deal with House Republicans to raise the debt ceiling before a June 5 deadline announced earlier in the day.

"I hope we'll have some clear evidence tonight, before the clock strikes twelve, that we have a deal," Biden told reporters on the South Lawn of the White House shortly after 6:00 p.m. ET. "It's very close, and I'm optimistic," he added.

White House and congressional negotiators were closing in on a deal to raise the debt ceiling for two years, officials familiar with the negotiations told CNBC earlier in the day Friday.

"I'm hopeful we'll know by tonight whether we are going to be able to have a deal," Biden said.

Negotiators still hadn't reached a deal by the end of Friday, however.

The two sides got breathing room Friday afternoon, as Treasury Secretary Janet Yellen said the U.S. would not run out of money to pay its bills before June 5 — four days later than her previous estimate.

But even as the outlines of an accord on the central issue of government spending came into view, new roadblocks threatened progress on a final deal.

"We continue to have major issues that we have not bridged the gap on," Republican negotiator Rep. Garret Graves of Louisiana told reporters Friday afternoon in the Capitol.

Markets rose Friday, buoyed in part by optimism that the sides would reach a deal before the Treasury runs out of money. Failure to lift the borrowing limit could damage the U.S. economy and jeopardize benefits millions rely on to survive.

Under a proposal that was on the table Friday, House Republicans would achieve at least two of their highest priorities in exchange for voting to raise the debt ceiling. Firstly, to roll back baseline federal spending in 2024 on most discretionary programs. And second, to rescind some of the $80 billion allocated for the Internal Revenue Service as part of 2022's Inflation Reduction Act, two sources with knowledge of the talks told CNBC early in the day.

That rescinded IRS money would then be used by to cover much of the shortfall in domestic funding created by the GOP spending cuts, essentially preserving the programs while technically cutting the overall topline figure. The Pentagon and veterans health benefits would be spared from any cuts, and see their funding actually increase next year.

Details were still fluid on Friday, with two officials calling the IRS funding trade off "a live issue."

On its face, a bargain like this could offer both parties a win. Republicans could claim, correctly, that they had secured a cut in baseline government spending for fiscal year 2024. Democrats, likewise, could say they preserved the vast majority of domestic programs at funding levels either equal to or just below their current ones.

But progress on one front in the talks belied new tensions on a separate issue: The Republican demand that any deal include new work requirements for recipients of federally subsidized health insurance, or Medicaid.

House Democrats vehemently object to the measure, saying its inclusion in any final deal will cost Speaker Kevin McCarthy the Democratic votes he needs in order to pass any bill through the House.

In a sign of how contentious the issue had become Friday, Graves gave a curt response when a reporter asked him if the GOP would be willing to drop the work requirements in order to close a final deal.

"Hell no! Not a chance," Graves replied.

Biden struck a similarly defiant tone when a reporter asked the president what he would say to "Democrats that don't want you to bow on work requirements."

 "I don't bow to anybody," Biden shot back.

Graves is one of two House Republicans leading the negotiations. The other is Rep. Patrick McHenry of North Carolina. The White House has tapped Office of Management and Budget director Shalanda Young and Biden counselor Steve Ricchetti to negotiate on President Joe Biden's behalf.

Both teams have been working around the clock for more than a week to find a path forward through a bitterly divided Congress in time to avoid a potentially catastrophic debt default.

The urgency of the negotiators' task was underscored this week by an announcement late Wednesday that the Fitch credit rating agency had placed the United States' triple-A status on "rating watch negative."

Officials at the International Monetary Fund wrote in their annual assessment of the United States, published Friday, that "brinkmanship over the federal debt ceiling could create a further, entirely avoidable systemic risk to both the U.S. and the global economy."

Yellen told Congress on Friday that the U.S. "will have insufficient resources to satisfy the government's obligations if Congress has not raised or suspended the debt limit by June 5."

Even a short-term, technical debt default for a few days could wreak havoc on the domestic economy by driving up interest rates and eroding trust in the U.S. dollar as the world's reserve currency. Fitch, for example, has already indicated it would downgrade America's credit rating if Congress blows past the Yellen's deadline.

A prolonged default could force the government to delay payments like Social Security benefits and food assistance to low-income households, money that tens of millions of Americans rely upon to survive.

The four additional days allow negotiators more time to reach a deal and still ensure Congress would have enough time to vote on legislation to raise the borrowing limit. The June 1 deadline had lawmakers facing a crunched timeline, especially as McCarthy has promised to give House members 72 hours to read the bill before a vote.

Republicans hold a narrow majority in the House, while Democrats have a slight edge in the Senate. So negotiators need to craft a bill that can pass both chambers.

But this does not mean negotiators need to reach an agreement that everyone will support. Democrats and Republicans acknowledged this week that any final bill is likely to lose votes from hardliners on both sides.

"I don't think everybody is going to be happy at the end of the day," McCarthy said Thursday in the Capitol. "That's not how this system works."